Dollar higher in late afternoon

Market eager for fourth-quarter GDP report Friday

By

LeslieWines

NEW YORK (MarketWatch) - The dollar zoomed past the euro and yen late in Thursday's session, after a stronger-than-expected durable goods report provided support to the battered currency and revived speculation that U.S. rate hikes will continue after the first quarter.

The dollar also drew strength from higher Treasury yields, as the yield on the 10-year note closed at its highest level of the year.

The euro last was down 0.03% at $1.2215 as the dollar rose 0.6% to 116.33 yen. The dollar last traded above 116 yen level on January 5.

Earlier the Commerce Department reported that orders for U.S.-made durable goods rose 1.3% in December despite a large decline in aircraft orders.

The 1.3% gain was much stronger than the 0.5% expected by economists surveyed by MarketWatch. See full story.

The result provides some fuel for a case for the Federal Reserve to continue lifting rates this year because it suggests the possibility of accelerated inflation later in the year.

A rise in inflation could compel the Fed to keep lifting rates, a development that would please dollar proponents because the dollar would preserve its attractive rates differential against other currencies.

A new weekly jobless claims report also fed the case for continued rate increases.

First-time claims for state unemployment benefits rose 11,000 to a seasonally adjusted 283,000 in the week ended Jan. 21, the Labor Department said. See full story.

Economists surveyed by MarketWatch were expecting initial claims to rise to about 305,000. See Economic Calendar.

However, market players remain worried that Friday's gross domestic product report for the fourth quarter will show a growth rate of 3% or below, said Brian Dolan, head of currency research at Gain Capital.

Market participants would be more comfortable with a quarterly growth rate closer to 4%, a result that also would advance the case for a hawkish rates policy, he said.

The MarketWatch forecast, based on a survey of economists, is for a gain of 2.7%, which would be much smaller than the 4.1% advance the economy registered in the third quarter.

According to Action Economics, the 2006 outlook for the yen remains bearish.

"Just like last year, the yen is correlating inversely with its domestic stock markets, gains in which boost Japanese investor risk appetite that in turn leads to demand for high yielding foreign assets," the research firm said.

The market earlier in the week and last week was negative on the dollar following signals that the Federal Reserve could wrap up its rate hikes program by the end of the first quarter.

There also are rumblings that the eurozone might lift rates more aggressively in 2006 than expected, another possible development that would eat into the attractive rate differential the dollar has enjoyed against other major currencies.

Overnight, the Japanese trade surplus for December came in at 914 billion yen, compared with expectations for a 950 billion surplus, according to Bear Stearns Research.

"However, it is not all bad news as the slide was largely driven by a strong 27.3% rise in imports," said Steve Barrow, chief currency analyst at Bear Stearns. "While this reflects oil prices, to some extent, underlying imports are rising, which bodes well for the economy."

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